The legal line between farm business and farmer:

Farming is a business and a way of life. But, if a farmer is expecting liability protection for her personal assets, she might want to keep the distinction between personal and business matters clear, at least when it comes to accounting.

What’s the situation?

After pondering how risky a farming career can be, and the debt she’ll take on to get it started, Farmer Jamie decides she wants to protect her personal stuff–like her car and her savings account–from the liabilities her CSA farm might incur. So she steers clear of a sole proprietorship and decides to form an LLC or a corporation.

Where does the law come in?

Forming a farm business as an LLC or a corporation isn’t the end of the day when it comes to liability protection. To be sure a Jamie gets the liability benefits of an LLC or corporation, she needs to operate the farm as if it is distinct from Jamie personally. Since a farm is often an extension of the farmer, this can be tricky. 

Details, please:

Many young people (and older people) are getting into farming these days. For reasons that vary from enjoying outdoor work to taking pleasure in good food, it’s a very personal lifestyle choice that attracts all kinds of folks. The intense seasonality and physical demands of the work make it especially intimate. And it’s food! That’s a very personal thing.

For a lot of farmers, there’s no distinction between personal life and work life. The home is the farm. The food in the field is the food on the dinner table. When market ends and you’ve got a pile of beets, you trade it for your neighbor’s leftover cheese. If you want a quarter of beef, you might do a little custom field work for it. It’s this lifestyle of companionship with neighbors and earth that makes farming so attractive.

In a way, state lawmakers have given business owners a choice. We can choose to merge business and personal, and be personally liable for our businesses, or we can choose to make them separate and protect our personal assets. It’s a bargain, more or less. The laws that grant an individual the right to protect their personal assets from business liabilities also require that the person recognize that distinction in how they run their business.

What does this mean? What behavior shows a distinction between a person and her business? Well, in Jamie’s example, she shows a distinction between herself and her business by never mixing personal and business accounts. When Jamie takes in CSA sales, that money gets posted to her farm business account, not to her personal checking account. When Jamie wants to buy some personal groceries or new clothes, she pays from her personal account. Jamie pays herself or gives herself a distribution of the farm’s profits in a distinct transaction so she knows what’s hers and what’s the farm’s.   

For a farmer used to paying with whatever credit card is handy, the obligation to distinguish between farm and personal assets can be a hassle. It might dissuade some farmers from choosing an LLC or a corporation. But there is a plus side for the farmer that chooses the extra time and attention that an LLC or corporation might require: An accounting system that distinguishes between person and farm is also very helpful in analyzing your revenues and expenses or in considering a new crop or food venture.  It also might make it easier for the farmer’s accountant to help optimize the taxes.

In legal-speak, this distinction between a person and his business is called the “corporate veil.” If a court chooses to go around the corporate veil and take personal assets anyways, the veil is said to be “pierced.” Exactly what kind of behavior will motivate a court to pass your business entity and go after your personal stuff? Well, that depends on your state’s case law. Good accounting is a big part of it. Fortunately, good accounting has a lot of other benefits as well.

So that’s a bird’s eye view of the major benefits–and obligations–of getting liability protection from an LLC or corporation. There’s plenty of other distinctions between an LLC or a corporation, but we’ll get to those in the future.

What do you think?

These days, most businesses are deciding to form as an LLC because of the liability protection it offers to their personal assets. But I haven’t seen any numbers on farm businesses specifically. Is the liability protection a motivating factor in your entity choice?

Comments
4 Responses to “The legal line between farm business and farmer”
  1. Marci says:

    Thanks for another great article! We are struggling to make this very decision. We have a separate account for the farm, but up to this point we have defaulted to sole proprietorship. But we are concerned about liability protection partly because we are farming on leased land. Would a general partnership come with some liability protection or are the best options and LLC or corporation? What are the issues of business entities specific to farming leased land? Thanks!

  2. Brent says:

    I am an aspiring farmer, currently fulltime filmmaker. I have my own production company that is registered LLC.

    When the time comes to start up my farm, I wouldn’t think twice before registering it as an LLC, its own bank accounts, etc. I’ve seen the importance between my personal finances and my production company, and don’t see what the difference would be with a farm.
    There are so many pro’s to having your income from the farm be filtered through your LLC. Write off expenses, tax purposes, and so on.

  3. Rachel Armstrong says:

    Hi Marci- I’m glad you like the articles! To answer your question, no, a general partnership will not provide any more protection than a sole proprietorship. An LLC and a corporation do protect non-business stuff from business liabilities. In two weeks, I’ll be writing about how to start an LLC- it’s generally easy but the specific rules are specific to your state. Stay tuned on that one! You asked a terrific question about liability concerns for farmers who lease land- I’m not prepared to answer that right here but I promise you a blog post on that topic specifically.

    Brent- I think you’re right on! There are many pros to setting up an LLC. However, to answer your question, the reason I think many farms don’t follow do it that, for beginning farmers, most assets are farm assets. Therefore, when a farmer tries to allocate assets between business and personal, especially if she is a beginning farmer, she ends up with a pretty small pile of stuff that’s personal. Sometimes, it doesn’t seem worth the bother to file as an LLC if the farmer is only protecting a pretty small chunk of change. Then, as the farmer’s business grows and he or she does acquire personal resources (like personal savings), I think they forget to reorganize. I hope to convince farmers that starting and maintaining an LLC (or corporation) is perhaps easier than they thought, and well worth the effort from the start. It’s tough to change accounting habits after you’ve started your business.

    Thanks for the great comments!

  4. Rachel,
    Thank you so much for addressing this potential for \"piercing the corporate veil.\" My husband and I chose to have an LLC/partnership to limit our personal liability, but as you say that also is dependent upon good accounting practices; keeping personal and farm business as separate as possible. I have a number of questions that are focused on just that. It would be great if you could team with an accountant and craft an article with specific examples of related good accounting practices.

    A related question, for example, is how does one reflect farm land payments being made by the farmers, using off-farm income, as a farm expense, in accounting terms? And, in turn, still keep the farm business (LLC) from owning the land? I assume that if the LLC makes land payments (assuming the LLC is making enough money to make these payments), then the LLC would own the land and \"the veil would be pierced?\" Some have suggested having the farm business lease the land from the owners.

    Thank you again!!!

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